ROI Calculation

[Getafix]

Hi All,

I have had a heated debate about the meaning/calculation of ROI on another thread. I would be interested to see what the consensus opinion is on this. I have my ideas but will not express them to not bias this discussion (not til the end anyway)

To make this easier I have created an example:


The investor has an initial bank of 12000.

Investment 1
------------
i) 4000 invested in company abc
ii) 5000 invested in company def

Positions closed:
i) a profit of 500 for investment in abc
ii) a profit of 100 for investment in def

Investment 2
------------
i) 12000 invested in company ghi
position closed:
i) a profit of 1200 for investment in ghi


The question is: what is this investor's ROI over these investments?

 

[Barramundi]

I'd say 5% for Investment 1 ((500 + 100)/12000 x 100) and 10% for Investment 2 (1200/12000 x 100).

I think you really need to calculate ROI on the total available pool.

To calculate your total return in business terms you'd also need to factor in other costs eg. computer, overheads etc but that obviously goes beyond the scope of the question.

 

[Getafix]

I said I wouldn't butt in til the end but I think I should clarify the question. What do you calculate as the "total" ROI.

 

[Scotty2Cues]

Id say only the % profit matters but at a guess I go

investment 1) 6.7% ROI as our invested 9000 returned 600

investmenr 2) 10% ROI as our invested 12000 returned 1200

 

[Jack o'Clubs]

15% (ie 1800/12000). Time is also a factor, so you should consider annualising - after all if he's done that in a month it's very different to doing it over a year, or five years.

 

[Barramundi]

To calculate the ROI you simply divide the account value at the end of the period in question by the account value at the beginning period and multiple by 100 then subtract 100.
So it's (12000 + 500 + 100 + 1200)/12000 x 100 - 100 = 15%

 

[Scotty2Cues]

In total we invested 21000 and returned 1800 so thats 8.6% which is the average of the 2 investments considered seperately.

I dont know...:|

 

[Getafix]

This dilemna in calculation is clearly shown by Scotty2Cues and Barramundi in the points above. I prefer one of these 2 methods and would argue that one of the two methods is clearly more useful as an indication of performance.

 

[Scotty2Cues]

This dilemna in calculation is clearly shown by Scotty2Cues and Barramundi in the points above. I prefer one of these 2 methods and would argue that one of the two methods is clearly more useful as an indication of performance.

If you have £100 and invest £1 and it returns £50, wouldnt it be better to say that your £1investment reutrned £50 and so your account grew by 50%. So its just relating risk to reward.

It doesnt really matter what its called or what roi is.

Just need to specify account, amount invested (risk) and reward

 

[Jack o'Clubs]

I don't think there's a dilemma, I think it's just a question of being precise in the terminology about what you're measuring. If you're referring to the 'other thread' that I think you are (!), the issue is that the OP wasn't being at all clear about what he was actually measuring and the more he was asked to clarify the more he obfuscated - although maybe that's not the thread you mean at all!

The conventional way of measuring a return is to say: you've got a bank of £X now which was a bank of £Y when you started, so with all the various investments and trades you've made in the meantime you've generated a return of X/Y as a %. You would also want to be specific about the time frame. If you're going across longer time frames, then you'd probably start bringing in CAGR calculation to normalise it on an annual basis.

 

[Getafix]

I don't think there's a dilemma, I think it's just a question of being precise in the terminology about what you're measuring. If you're referring to the 'other thread' that I think you are (!), the issue is that the OP wasn't being at all clear about what he was actually measuring and the more he was asked to clarify the more he obfuscated - although maybe that's not the thread you mean at all!

The conventional way of measuring a return is to say: you've got a bank of £X now which was a bank of £Y when you started, so with all the various investments and trades you've made in the meantime you've generated a return of X/Y as a %. You would also want to be specific about the time frame. If you're going across longer time frames, then you'd probably start bringing in CAGR calculation to normalise it on an annual basis.

Hi Jack, I don't think the thread you refer to is the one I am talking about (it is my thread in sports betting - on Tennis Lays to which I refer) as it is very clear in my spreadsheet etc how the ROI is calculated. The discussion was I disagreed with other's perception of ROI.

From the posts so far though, maybe I am a little pedantic in my approach to ROI with too much emphasis on the word "Investment". I believe the portion of capital not being used in the investment should not be used in the denominator of the calculation (i.e., I agree with Scotty2Cues's interpretation) as it has no risk attached to it at that point in time.

 

[Barramundi]

I believe the portion of capital not being used in the investment should not be used in the denominator of the calculation (i.e., I agree with Scotty2Cues's interpretation) as it has no risk attached to it at that point in time.

I think it should be used in the calculation as it was tied up in the investment pool and not available to be used for any other purpose.

 

[Jack o'Clubs]

I think it should be used in the calculation as it was tied up in the investment pool and not available to be used for any other purpose.

Strongly agree.

 

[Getafix]

strongly disagree lol

 

[Getafix]

Seriously though... I look at this from a different perspective. I don't like risk aversion to have an impact on forseen performance I prefer to judge by underlying edge. Hence, preference for my version. Though I do appreciate in terms of judging mutual funds etc my version is no good because you can't get under the hood to see exact investments..

 

[Barramundi]

strongly disagree lol

Look at it this way. If you gave an investment manager $12000 and he gave you back $13800, the ROI is 15%. It really doesn't matter what happened or what part of it was used in the meantime. ROI is simply a comparison of what you ended up with as compared with what you started with. End of story.

 

[Jack o'Clubs]

But it's the same with the fund manager. At any time, he's going to have some of his fund in cash depending on how much risk he wants to take on at any particular time - they're rarely fully invested. When it comes to presenting his results, he doesn't say I returned X%, excluding the amount I kept in cash over the period. Reductio in absurdum - a fund manager with £100m who keeps all but £1m of it in cash, but doubles the £1m, can't tell his investors he has returned 100%.

Ultimately it only matters what you find useful, so if you want to look at it the way you do because as you say it helps you get under the hood, then that's great. It only matters at the point at which you present the results to a wider audience, when it needs to be presented conventionally.

 

[Getafix]

Ultimately it only matters what you find useful, so if you want to look at it the way you do because as you say it helps you get under the hood, then that's great. It only matters at the point at which you present the results to a wider audience, when it needs to be presented conventionally.

Good point Jack. It is apparant this this is one of those situations where the meaning in the sports betting world does not convert to that of the financial world. Good point though, it seems everywhere you look you have to be very clear about who is claiming what based on their own interpretations. One of those potential cases of "lies, damned lies and statistics".